The first of those factors is a country’s relative price level, which when elevated, causes the domestic currency to depreciate. Alternately, a drop in a country’s relative price level will cause its domestic currency to appreciate (Mishkin & Eakins, 2012). A way to think about how this factor works is that when the price of goods in one country increases, the demand for those goods will decrease and cause the value of the domestic currency to drop, which makes other countries products more attractive and their currency to
The first of those factors is a country’s relative price level, which when elevated, causes the domestic currency to depreciate. Alternately, a drop in a country’s relative price level will cause its domestic currency to appreciate (Mishkin & Eakins, 2012). A way to think about how this factor works is that when the price of goods in one country increases, the demand for those goods will decrease and cause the value of the domestic currency to drop, which makes other countries products more attractive and their currency to